Monday, June 21, 2010

Buying Gold at Record Prices

I recent wrote an article at HubPages entitled, Buying Gold at the Peak.  Essentially, I looked at what would happen if someone had begun in 1980 buying gold paying $1000 each January to buy gold.  I assumed that our investor paid $850 per ounce in January 1980 (buying at the peak) and then spent the next 31 years through 2010 spending $1000 each January to buy gold.

I then took that same individual and had them purchase the S&P 500 index using $1000 each January.  So two investors each spending $1000 each year from 1980 through 2010.  You might think that the investor buying stocks would have made a killing compared to someone buying gold.  I certainly thought that they might do better.

But in reality the difference was only about 2% total in favor of stocks.  I was really surprised given that gold was in a terrible bear market and stocks had the greatest bull run in history.

I mentioned this on another blog in the comments (did not spam with a link) and was criticized for not including dividends of the S&P 500.  It is a legitimate concern for sure but one that is not correct.  For if you include dividends (which are currently 2%), you need to include inflation as well and figure out the reduced purchasing power of the dollar. 

It turns out that the dividends and inflation cancel each other out and doing a simple calculation as I described is in fact legitimate, and the results are valid.  When I added in dividends and then adjusted for inflation, the results were incredibly close.  The bottom line is that gold does produce income but protects purchasing power.  Stocks produce income to make up for the loss of purchasing power.

It really didn't matter if you invested in gold or stocks, you still ended up in the same place with the same wealth at the end of 31 years.  The key was investing on a consistent basis and buying whether the price was high or low.  So don't be afraid to start investing in gold now.  Or don't be afraid to invest in stocks now.  Just keep a long term perspective.

Until next time--KEEP IT REAL!

Saturday, June 5, 2010

A New Investment in Natural Gas

I reestablished a position in natural gas yesterday by buying shares in Chesapeake Energy (CHK) as well as buying October 25 puts.  My plan is to wait until next month and sell covered calls if the stock is up or buy additional shares if the price is down.  You may be wondering about the rationale of such a strategy, but think about it this way. 

If the price of the shares is down to $22 or $21 per share, I have an automatic profit on those shares since I have purchased the puts for October and can sell those shares for $25.  Granted the puts cost some money, but I will sell some covered calls to ultimately pay some (if not all) the cost of those puts. 

If the stock is up from my purchase price, then that is also good.  I can sell covered calls at a higher strike, get some immediate cash and then additional profit in the form of capital gains.  I think it will turn out to be a good trade.

There are several factors that might impact the price of natural gas over the next several months which will have some bearing on the price of CHK.  Natural gas supplies are about 15% higher than normal for this time of year which would tend to push prices lower.  Hurricane season in the Gulf of Mexico could push prices higher if a lot of damage is done.  A warm summer could push prices higher since electricity generation needed for air conditioning is often provided by natural gas generating plants.

Truthfully, however, I have no idea what will be happening to prices this summer.  That is why I have hedged my position with puts and will also be averaging into a larger position over the next few months.  Over time, I believe that inflation and demand will eventually bring down the over supply but that could be a year or several away.

Nonetheless, I still like having exposure to real assets.  My house is warmed by natural gas as is my water year round.  If my bills start to rise, I want to be able to make money in the process.

Until next time--Keep it REAL!

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